Question

g Interest is compounded twice per year. Her stated annual interest rate is _____ for this twice-a-year compounded investment.

Answer 1

Answer: d. 10.5%

Explanation:

Formula for future value is;

Future value = Amount invested * ( 1 + r) ^ n

Making r the subject, the formula becomes;

= (Future value/ Amount invested)^ (1/n) - 1

= (500,000 / 120,000)^ (1/28) - 1

= 0.052289

= 5.23%

This is on twice-a-year basis so annual rate is;

= 5.23 * 2

= 10.46

= 10.5%

Note; Period of 28 was used because investment was compounded twice a year so the 14 years should double.